As I write this, the pending Presidential election is days away and too close to call. And while stark differences are obvious in terms of style, substance, policy and political priorities, both candidates have staked out decidedly populist positions. And, regardless of which candidate wins, it seems quite likely that we will continue to be faced with a divided government. As such, new legislation will have to be championed by the President and enjoy broad bipartisan Congressional support.
Do we see any such possible political convergence? Not so much.
Worryingly though, one area where there seems to be broad bipartisan support is a continued trend to criticize, demonize and regulate large financial institutions (e.g. big banks and Wall Street). Witness both political parties recently excoriating Wells Fargo’s CEO, John Stumpf in a figurative public flogging in the Senate over its well-publicized sales incentive scandal.
The bipartisan and regulatory fallout continues from the Great Recession and public sentiment is still very negative towards financial institutions in general.
In addition, the emerging Fintech segment remains largely unregulated and has already come under scrutiny from regulatory bodies and Congress. There is a growing commercial finance component to Fintech start-ups that is beginning to edge into equipment financing. Competitive issues aside, efforts to regulate this segment could possibly over-reach into the equipment finance industry.
Think about it: negative public, regulatory and political sentiment towards the finance industry. Throw into the mix a populist President and the possibility of material heavy new regulatory regimes aimed at a wide swath of the finance industry does not seem far-fetched at all. Like I said earlier, this could be a gathering storm for the equipment finance industry.
Is there anything that the equipment finance industry can or should do in response to this potential threat?
Besides a robust lobbying effort in Washington to help educate Congress, the White House and regulators, it seems like our industry could do more to self-police its business practices. While it’s debatable whether this will inoculate the industry from government interference and regulation, I would argue that we should do it anyway because it’s the right thing to do.
We still have too many equipment finance institutions with shameful, unethical and unprofessional business practices that we as an industry should work more aggressively to identify and weed-out.
Here are some examples of practices that the industry needs to address:
- Deceptive Proposals, Offer Letters, MOUs. Even the most mainstream players in our industry can do better. However, there are too many smaller financial intermediaries that make a practice out of creating legal “snares” for lessees using such documentation.
- Bait and Switch Behavior. A practice where the finance sales person’s initial proposal is not borne out in the operative documents. This may be hard to fix, but the burden is on management of all equipment finance enterprises to police its sales force and insure that financing proposals and offer letters clearly reflect the terms and conditions of the operative financing documents.
- Unfair or Unreasonable Evergreen Renewal Language. This is a longstanding black eye for the industry. For too long, lessees have been faced with unreasonable and confusing burdens when it comes to end-of-lease decisions. It is high time for the industry to set standards for clear, easy and unambiguous end-of-lease terms that do not unfairly burden or injure lessees.
- Confusing or No Termination Language. Again, the equipment finance industry needs clearer standards on what is appropriate and reasonable.
- Financing Agreements Improperly Structured for the Transaction. Generally the provenance of smaller independent finance enterprises, but still an issue.
- Financing Agreements with Deceptive and Convoluted Language. I believe this problem is still pervasive in the industry.
- Unreasonable Residual Values and/or Financing Structures Designed to Flagrantly Enrich the Lessor. I think this is a problem throughout the industry…for too long the industry has hidden behind the "black box" of operating lease structures to unreasonably profit at the expense of unsophisticated lessees. Caveat Emptor is not a progressive, mainstream business practice. Full disclosure is the solution here.
It is time for the leaders of the equipment finance industry to take action and to proactively clean house. At the very least, we need to set higher professional standards, establish a self-policing regime that has some teeth and seek ways to help our customers avoid the unscrupulous, the unprofessional and the unethical.
The possibility of the federal government seeking to impose significant new regulations on the equipment finance industry is real and growing. Failure to act is an open invitation to let others tell us how to run our businesses and industry.